General Motors’ Bankruptcy Imminent Within 30 Days
By Chris Haak
I really don’t enjoy writing about bad news. I’d much rather rave about how the exhaust note of a Corvette at full bore made the hair on my arms stand on end, or how passers-by waved and gave me the thumbs-up as I rumbled by in a Dodge Challenger SRT8. I also pains me to chronicle the end of General Motors as we know it. I grew up in pretty much an all-GM household. When I was born three [and a half] decades ago, my father’s job was selling new Chevrolets and Cadillacs. My first ten or so cars (the count is difficult to keep, since my father is now self-employed in the car business and the line between “my car” and “a car in inventory that I drove for a while” was pretty blurry at times) were all GM vehicles. Then, the first three new cars that my wife and I bought were, in order, a Honda, a Nissan, and a Toyota. Last summer I came back to the GM fold for my own car, a 2008 Cadillac CTS. Bottom line: I’ve always held a soft spot in my heart for this company, in spite of some of the absolutely dreadful products that they’ve sold to the public over the years. But why would I?
GM is already just a shell of its former self. The company is already very much under the control of the federal government, as evidenced by the way the government showed the door to former CEO Rick Wagoner, and more recently, by the way GM’s latest debt offering proposed giving the government a 50% stake in the company in return for forgiving $10 billion in loans, but giving bondholders a measly 10% stake in return for forgiving about $24 billion in debt. That last part is what has bondholders up in arms; they rightfully feel that they are being treated unfairly, and are quite unlikely to accept the terms of GM’s debt-for-equity exchange offer by the deadline at 11:59 EST on May 26, 2009. The US Treasury (of course) will have the final say, but GM believes that ninety percent of outstanding debt by value will have to be tendered for the offer to be considered a success. That is extremely unlikely to happen.
So what happens when the clock strikes midnight just a minute after the tender offer’s expiration date and turns to May 27? GM will have three more business days, plus a weekend, to file for Chapter 11 bankruptcy protection. At that point, all bets are off. The government will provide debtor-in-possession financing to continue operations, but plants will close, models may be eliminated, dealers will be culled, employees will lose their jobs, suppliers may fall like dominos, and basically all hell will break loose. And then it gets even more interesting.
Even if a bankruptcy judge changes the terms of a bankruptcy exit to be more favorable to GM’s debtholders, the bottom line is that both the government and the UAW will own significant stakes in the company. That scenario creates some interesting potential conflicts. The government wants to recover taxpayer money, preserve jobs, increase fuel economy, and get out of the car business. The union wants to preserve jobs and benefits. Preserving jobs and recovering taxpayer money may be mutually exclusive objectives, since keeping excess staff on hand means that the company’s costs will be higher than necessary, and making the taxpayers’ repayment take longer. Depending on the price of gasoline, increasing fuel economy in a cheap-gas scenario might be contrary to the company’s success as well. Nobody wants to pay too much to fuel their car, but Americans have notoriously short memories, hybrid and small-car sales are way down, and Americans love big, powerful, expensive cars. In other words, Americans love exactly the kind of cars that will be difficult to keep in the lineup if CAFE standards go beyond 35 miles per gallon, as California and her allies are pushing for.
The Wall Street Journal had an interesting piece this morning in which it analyzed additional potential conflicts inherent in government ownership of a company that it also regulates. The WSJ piece also offered some hints as to just how long the US government might own GM. While some are advocating for a quick sale, a more likely scenario is to hold the company for a few years until auto sales rebound and the company is on a more firm footing. While that would keep the government in the car business longer than many would like, it also would theoretically fetch a more attractive price, which would benefit taxpayers. Some analysts have pointed to the government’s 11-year ownership of Conrail, which it owned from 1976 to 1987, as a possible model for its ownership of a majority of GM. Either way, don’t expect to see many new fun, big-horsepower, gearhead-friendly cars from GM for the next decade or two.
Is it too late to become a Blue Oval fan? I never thought that day would come, but if Ford is still selling interesting products like the Shelby GT500, I may have to reconsider my loyalties. Interesting times, indeed.
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